Wage and hour is now the fastest-growing type of employment practices claim. The number of Fair Labor Standards Act (FLSA) class actions hit a record in 2016, when claimants filed more than 8,990 cases in federal courts. That number is expected to grow by the end of this year.
Considering the average wage and hour case settles for $2.5 million, directors, officers and owners must take a closer look at how they protect themselves against potential liabilities—especially because, over the last year or so, the wage and hour landscape has significantly changed for the worse.
The Department of Labor enforces the federal FLSA, which sets basic minimum wage and overtime pay standards. In addition to the federal law, all states have their own wage and hour laws, and companies must comply with both—applying whichever law provides the greatest benefit to the employee.
Historically, wage and hour was solely a corporate exposure. But now, states around the country are enacting laws which hold individuals personally liable for violations of wage and hour laws. In 23 states, legislation is pending that could turn wage and hour litigation into a personal liability for your clients.
These new state laws matter for high-level management, regardless of who enforces the company’s policies and procedures.
With rare exceptions, D&O and EPLI policies do not provide wage and hour coverage—nor do they provide personal liability coverage arising out of wage and hour. Approximately five carriers consider wage and hour coverage for private companies in the most challenging states, with typical sublimits ranging from $50,000 to $150,000. Coverage is limited to defense costs, with no coverage for indemnity for judgments or settlements.
But e ven this limited coverage is unavailable in many states, and in all states for the highest-risk types of businesses, including restaurants, franchises and health care facilities. Plus, a typical EPLI policy completely excludes the exposure, via either an explicit exclusion or excluded portions of loss.
Currently, six markets—all but one based in Bermuda—offer standalone wage and hour insurance policies, with minimum retention starting at $2.5 million. Of the 35 or so policies that have been purchased, all but two have a $5 million retention. Fourteen of the policies include employment practices coverage as well as wage and hour.
But these policies are designed solely for the largest corporations, usually with 25,000 or more employees. Large corporations can expect more underwriters to slowly enter the market on both a primary and excess basis. For small to midsize companies, standalone wage and hour insurance is simply not available at this time.
Without a solid insurance solution, how can you help your clients proactively minimize their exposure to wage and hour litigation? A good start is encouraging them to take these five steps:
- Engage qualified legal counsel to audit wage and hour policies and procedures.
- Exercise due diligence with respect to proper classification of employees as exempt or non-exempt, employee or independent contractor, and the like.
- Stay abreast of the changing landscape of wage and hour legislation.
- Enforce corporate policies and procedures with written rules for exceptions.
- Incorporate ongoing training at all levels.
Peter R. Taffae is managing director at Executive Perils, Inc.